When you take out a mortgage, one of the biggest decisions you’ll make is whether to choose a fixed-rate mortgage or an adjustable-rate mortgage (ARM). This choice affects your monthly payment, how much interest you’ll pay over time, and how much risk you take on if interest rates change.
This guide explains how each type works, the pros and cons of both, and how to decide which is right for your situation.
What Is a Fixed-Rate Mortgage?
With a fixed-rate mortgage, your interest rate stays the same for the entire life of the loan. The most common terms are 30 years and 15 years, though 10-, 20-, and 25-year terms are also available from many lenders.
Because the rate never changes, your monthly principal and interest payment stays the same from the first month to the last. (Your total payment can still change if property taxes or homeowners insurance costs held in escrow go up or down.)
Pros of a fixed-rate mortgage
- Predictability: Your principal and interest payment never changes, which makes budgeting easy.
- Protection from rising rates: If market rates climb, your rate stays locked.
- Simplicity: There are no adjustment schedules, caps, or indexes to understand.
Cons of a fixed-rate mortgage
- Often a higher starting rate: Fixed rates are frequently higher than the initial rate on an ARM.
- You don’t benefit automatically when rates fall: To get a lower rate, you’d need to refinance, which comes with closing costs.
What Is an Adjustable-Rate Mortgage (ARM)?
An ARM has an interest rate that is fixed for an initial period and then adjusts periodically based on a market index. ARMs are usually described with two numbers, such as 5/1, 7/6, or 10/6:
- The first number is how many years the initial rate stays fixed.
- The second number shows how often the rate adjusts after that. A “1” usually means once a year, while a “6” usually means every six months.
For example, a 7/6 ARM has a fixed rate for seven years and then adjusts every six months.
How ARM rates are calculated
After the fixed period, your new rate is calculated as:
Index + Margin = Your interest rate
- Index: A benchmark rate that moves with the market. Many U.S. ARMs now use the Secured Overnight Financing Rate (SOFR).
- Margin: A fixed number of percentage points set by your lender that stays the same for the life of the loan.
Rate caps
Most ARMs include caps that limit how much your rate can change. Caps are often written as three numbers, such as 2/1/5 or 5/1/5:
- Initial adjustment cap: The most the rate can change at the first adjustment.
- Periodic cap: The most it can change at each later adjustment.
- Lifetime cap: The most it can rise above the starting rate over the life of the loan.
Always ask your lender for the caps and calculate your worst-case payment.
Pros of an ARM
- Lower initial rate: ARMs often start with a lower rate than fixed-rate loans, which means lower early payments.
- Potential savings if you move or refinance early: If you sell before the fixed period ends, you may never face an adjustment.
- Your rate can fall: If market rates drop, your payment may decrease after the fixed period.
Cons of an ARM
- Payment uncertainty: Your payment could rise significantly after the fixed period.
- Complexity: Indexes, margins, and caps make ARMs harder to understand.
- Refinancing isn’t guaranteed: If your credit, income, or home value changes, you may not qualify to refinance when you want to.
Fixed vs Adjustable: Side-by-Side
| Feature | Fixed-Rate Mortgage | Adjustable-Rate Mortgage |
|---|---|---|
| Interest rate | Same for the whole loan | Fixed at first, then adjusts |
| Starting rate | Often higher | Often lower |
| Payment stability | Very stable | Can rise or fall after the fixed period |
| Risk if rates rise | None | Payment may increase (up to the caps) |
| Complexity | Simple | More complex |
| Best for | Long-term owners who value stability | Buyers planning to move or refinance within the fixed period |
How to Decide: 5 Key Questions
1. How long do you plan to stay in the home?
If you expect to stay for many years, a fixed rate protects you from future rate increases. If you’re fairly sure you’ll move within five to seven years, an ARM with a matching fixed period could save you money.
2. Can you afford a higher payment later?
Calculate your payment at the ARM’s lifetime cap. If that payment would strain your budget, a fixed-rate mortgage is the safer choice.
3. How much do you value certainty?
Some people are comfortable with some risk in exchange for lower early payments. Others sleep better knowing their payment will never change.
4. What is the rate gap right now?
The advantage of an ARM depends on how much lower its starting rate is compared with a fixed rate. When the gap is small, the savings may not be worth the added risk.
5. Is your income likely to grow?
If you expect strong income growth, you may be better able to handle a future increase. But plan based on realistic expectations, not best-case hopes.
What About 15-Year vs 30-Year Fixed?
Within fixed-rate loans, you also need to choose a term:
- 30-year fixed: Lower monthly payments, but much more interest over the life of the loan.
- 15-year fixed: Higher monthly payments, but usually a lower rate and far less total interest.
Some borrowers choose a 30-year loan for flexibility and make extra principal payments when they can, getting some of the benefits of a shorter term without committing to the higher payment.
Common Mistakes to Avoid
- Focusing only on the starting rate without calculating the worst-case ARM payment.
- Assuming you’ll be able to refinance before an ARM adjusts.
- Not reading the loan estimate, which shows caps, adjustment schedules, and total costs.
- Stretching your budget to the maximum you’re approved for.
- Not comparing multiple lenders — rates and fees can vary significantly.
Frequently Asked Questions
Can I switch from an ARM to a fixed-rate mortgage later?
Usually by refinancing into a fixed-rate loan, which involves a new application and closing costs. Our guide to mortgage refinance rates explains how refinancing works.
Is an ARM risky?
It carries more risk than a fixed-rate loan because your payment can increase. Caps limit that risk, and an ARM can be a sensible choice if you understand the worst case and plan accordingly.
Do ARMs ever go down?
Yes. If the index falls, your rate can decrease at an adjustment, subject to any floor in your loan terms.
Which is more popular?
In the United States, the 30-year fixed-rate mortgage is by far the most common choice, though ARMs tend to become more popular when fixed rates are high.
Final Thoughts
A fixed-rate mortgage offers stability and peace of mind, making it the best choice for most people who plan to stay in their home long-term. An adjustable-rate mortgage can save money for buyers who expect to move or refinance before the fixed period ends — as long as they understand the caps and can handle the worst-case payment.
Before applying, check your credit — see how credit scores work — compare loan estimates from several lenders, and read our guide to getting approved for a mortgage.
This article is for general educational purposes and is not financial advice. Mortgage products and terms vary by lender and country.